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How software can help smooth the transition to fiduciary-rule compliance

If a firm's transition to the Best Interest Contract Exemption is done using paper contracts and disclosure forms, it could be costly, difficult and risky to manage

Jun 9, 2016 @ 3:00 pm

By
Carlos Guillen

+ Zoom

Although the U.S. Department of Labor's (DOL) fiduciary rule has become the subject of two new lawsuits that could delay implementation, many investment advisers, brokers-dealers and other firms that offer retirement accounts are making operational changes to transition from transactional commission structures to fee-based fiduciary relationships.

The legislative shift is another in a series of historic stress tests that exposes the extent to which firms can effectively manage the convergence of compliance and technology. Whether harkening to Y2K readiness, a rising tide of cybersecurity threats or the ascendance of robo-advisers, financial firms are perennially pressed to leverage the opportunities while overcoming the challenges technology can introduce.

The fiduciary rule's Best Interest Contract Exemption (BIC Exemption or BICE) allows advisers to continue receiving commission-based compensation under allowable exclusions, including a three-way contract of disclosure between the investor, adviser and investment firm.

Opponents of the BIC Exemption argue that it is complex, ambiguous and will add significant burden and costs to compliance budgets. These claims have merit, especially when considering how firm liability could be affected by the introduction of a commercial contract into the adviser-client relationship.

The costs and complexities of adopting this aspect of the rule would be all the more acute for firms that approach the transition with paper-based, manual processes. If a firm's exemption transition is done using paper contracts and disclosure forms, it could be costly, difficult and risky to manage, at best.

Software can help firms drive a seamless fiduciary transition. Some centralized systems feature a digital warehouse to store fees, pricing attributes and compliance documents, including a firm's policies and procedure.

An automated compliance-management platform enables users to easily cross-reference fee structures, revenue sharing arrangements, potential conflicts and tri-party attestations among the RIA, broker and investors. Supervisors can implement and test controls monthly, weekly, daily or on an ad hoc basis. Users can easily disseminate documents and disclosures, instantly share reports and schedule them to run on a recurring basis. Rules-based workflow logic can instantly be modified throughout the compliance-management life cycle, with exceptions that can be escalated and handled automatically, such as requests for overdue staff certifications.

Subsidiary systems can feed a consolidated compliance-management platform, ingesting input such as portfolio drift or trade exceptions that have been flagged. Supervisors can document tasks tailored to the policies and practices of their firm to ensure compliance as the fiduciary rule and operational requirements evolve.

An integrated compliance-management platform also provides an incredibly helpful audit trail of actions taken, including when and by whom. Centrally archived and digitally shared documentation cannot be manipulated after the fact but, on the contrary, demonstrates that rigorous and repeatable compliance processes are in place.

Risk-based decision logic and compliance controls can be deployed more easily and quickly than if a firm were to try and develop the capabilities in-house. In the case of the fiduciary rule, firms can automate the distribution of BIC agreements, transactional cost disclosures and staff certifications among all parties required.

The decision of which way to proceed — fiduciary transition or BIC exemption — is up to each financial firm based on its unique resources as well as client and compliance demands. The resources available to adhere to new regulations, including the fiduciary rule, are changing as well. Now firms can manage compliance with more sophisticated systems that even the leanest firms can afford. By leveraging technology-powered tools, firms can stay ahead of the compliance curve, even in the midst of seismic industry change, instead of being forced to react after the fact.

Carlos Guillen is president and CEO of BasisCode Compliance, which provides integrated software for compliance management to asset managers, investment advisers, broker-dealers, compliance consultants, law firms and other professional service providers.

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